Rent Growth, CapEx Selection, & More

release edition [016]

read time [10 minutes]

Welcome to The Multifamily Download, a weekly newsletter where I provide institutional insights to help you build an exceptional Multifamily career.

Today at a Glance:

Update: Being Tired + Busy
Rent Growth: Sunbelt Slump?
CapEx: Selecting Projects
Weekly Listen: Peter Linneman

Unlock Your Information Advantage...

Update

Before jumping into today's topics, I just wanted to share a few thoughts that have been weighing on me these past few weeks.

If for no other reason, I'm sharing these thoughts so that you know you're not alone in case you feel similarly.

First, I'm tired. The recent 24 hour news cycle has become a 1 hour news cycle.

In fact, I can't decide what to post on LinkedIn post because I feel inundated with so much news. I don't think humans are designed to know everything that's happening everywhere, every day, all the time.

Second, I'm busy. We have a portfolio of nearly 400 units under contract, and I'm asset managing our existing 1,500 unit portfolio.

From overseeing and coordinating due diligence with vendors, property managers, third parties, and on-site teams to recurring asset management calls and tasks, I've hardly had time to participate on LinkedIn. While I'm grateful to be busy, I am doing my best to stay balanced so that I can play the long-game.

So, after posting for 200 consecutive days, and because of the two factors above, I took a step back from LinkedIn this week as it was time for a break.

I don't know if I'll post 7 days per week on LinkedIn going forward, but I am still committed to publishing this newsletter every Saturday. You'll be the first to know if that changes.

Thank you for reading The Multifamily Download.

Rent Growth

Over the past few years, much has been made about investing in the Sunbelt or 'smile states' of America, and rightfully so.

Population migration trends have bolstered the economies of many of these cities, including Phoenix, Austin, Orlando, Atlanta, and Miami.

But this population growth led to opportunity for Multifamily developers to do what they do best:

Build more apartments.

And build they did.

2022-2024 will likely go down as the largest Multifamily supply boom of our lifetimes.

Now, as the economy shifts, it will be interesting to see how the Sunbelt Multifamily landscape shifts, too.

There's a case to be made for near term rent growth underperformance in the Sunbelt for a few reasons.

1. Weakening Economy

To put it simply, consumers are tapped out. Credit card debts are at all-time highs, auto delinquencies are above GFC levels, student loan delinquencies are mounting, and the top 10% of consumers continue to prop up ~50% of the economy's consumption.

Additionally, the number of American's working multiple jobs jumped by 76K in March to a record 8.94 million, or 5.5% of total employment, the highest since 2009.

Less discretionary spending means housing budgets will be carefully scrutinized right as many of the new apartments being delivered are Class-A builds with top-of-market rents.

2. Fearful Consumers

In addition to consumers tapping out, they're becoming increasingly fearful of the future. As I'll address in the coming weeks, consumer sentiment is falling like a rock, and rightfully so. The media has thrown rocket fuel on the tariff conversation, sparking FUD (fear, uncertainty, doubt) among consumers globally.

When consumers become scared they stop spending. When spending stops, businesses suffer. When businesses suffer, the economy slows. When the economy slows, GDP drops. When GDP drops, businesses conduct layoffs or businesses go out of business (graph below). When businesses conduct layoffs or go BK, consumers become more scared. You get the idea.

This is why maintaining consumer confidence and sentiment are critically important to keeping economies stabilized amid a challenging economic outlook.

3. Expiring 1st Generation Leases

As I wrote about here in TMD 006, 2024 was a year of record absorption. Strong absorption is a positive headline and indicator for the Multifamily industry.

That said, I can't help but wonder what will happen as 1st generation leases (that is, residents that are concluding their first 12 months of residency in a particular property) that were signed in 2024 begin to roll to renewal, particularly in high supply markets.

For example, new developments in Phoenix are offering 8-12 weeks free today. Owners of other newly constructed assets will likely have to offer similar concessions to keep their existing residents from moving elsewhere. This will continue to drag on net effective rents.

4. Softening SFR Market

Despite the lock-in effect, which I wrote about here in TMD 005, the single family market is beginning to soften. New single family homes sales have reached 500K+ for the first time since the GFC (graph below).

According to this post on X from Lance Lambert of Residential Club, 60 of the nation's 300 largest metro area housing markets had falling YoY prices in March, up from 23 in February and 31 in January.

Now, I don't know if the above will overpower the strong positive migration into Sunbelt markets. Generally speaking, Sunbelt markets are largely affordable, but when it comes to rent growth, I wouldn't bet on much of it in 2025 in the Sunbelt.

Conversely, there's a case to be made for rent growth outperformance in non-Sunbelt markets, including those that have:

1. Low New Supply

Historically, markets with low (<3% of existing stock under construction) have benefited from healthy rent growth. If you're looking for near term rent growth, bet on markets with low new supply under construction.

2. Challenging to Build

If developers can build, they will. Low supply markets remain undersupplied because the perceived (and/or real) risk and cost associated with building is simply too challenging for developers to stomach. In good times, low supply markets are difficult to pencil for new development of market rate properties. Today, they're impossible to pencil.

3. Low Rent-to-Income Ratios

In many cases, markets that are challenging to build also host strong employment with above-average incomes. This dynamic bodes well for keeping rent-to-income ratios low despite relatively expensive rent levels associated with the low supply. San Francisco is the poster child for this dynamic: strong employment, above-average incomes, and impossible to build. Not surprisingly, SF has been a strong recent performer, along with New York, Chicago, Philadelphia, Detroit, and other supply constrained (and often, over regulated) markets.

And yes, while low rent-to-income ratios exist in the Sunbelt, there are both (1) more options available today and (2) greater supply risk than low-supply, non-Sunbelt markets. Generally, investing in an already 'blue' market is far safer than a 'purple' market (one that could soon turn 'blue'), and it can be more predictable than a 'red' market due to the 'red' market's supply risk.

4. Roommate Decoupling

In Multifamily, there's an interesting phenomenon where a local market population can shrink while demand can increase. How can both be true simultaneously? Roommate decoupling. If roommates work in white collar jobs with strong real wage growth then perhaps they can all afford their own apartments (ex: San Francisco).

Again, I don't know how Sunbelt rent growth will look or perform in 2025, but if I had to place a bet today, I would bet on supply constrained markets (SF, LA, Chicago) outperforming most or all of the Sunbelt markets.

And I'd be surprised if it's close.

For more on rent growth trends, this LinkedIn post overviews the Yardi Matrix March 2025 National Multifamily Report.

CapEx

As you probably know, not all Capital Expenditure ("CapEx") projects are created equally.

Given this reality, how should projects be selected and prioritized?

I don't have all the answers, but as I continue to asset manage our 1500 unit portfolio, I thought it might be helpful if I shared some of my learnings and observations thus far.

First, some context.

Our portfolio consists of older vintage (70s and 80s) value-add properties. These are capital intensive assets, and require an acute attention to detail. Thankfully, we have wonderful equity partners that also have their eyes on the ball, which creates a synergistic collaboration.

Even so, I am on the GP/Sponsor team, and as such, it's my job to make data-driven and well-researched recommendations.

As I wrote about recently here on LinkedIn, different CapEx projects achieve different goals, and it's important to consider said goals before green lighting a project.

If your goal is to increase income, focus on CapEx projects that add value to the current residents.

• Renovate Units
• Enhance Amenities
• Improve Common Areas

Unit interiors, amenities, and common areas all provide tangible reasons for a resident to pay more than at a competitor property with inferior units, amenities, or common areas.

For example, a reimagined clubhouse or leasing office, adding a poolside gym, built-in BBQs, or cabanas all elevate the look and feel of a property.

Remember that people (including prospective residents) buy on emotion and justify with logic. Creating an emotional pull to the property will get them to commit, and competitive pricing with great customer service will help them justify their choice.

If your goal is to improve operations, focus on CapEx projects that reduce pain caused by future residents.

• Maximize Retention
• Avoid Screening Exceptions
• Conduct Thorough Background Checks

Lease renewals are effectively current residents agreeing to become future residents, and in doing so, they offer the owner a triple benefit: avoiding turnover costs (paint, carpets, floors, etc.), avoiding vacancy costs, and avoiding admin/marketing costs. The first two, turnover and vacancy, are obvious, but many operators don't consider the third one because it's a sneaky version of opportunity cost.

Every on-site staff member has a finite amount of bandwidth, and every additional unit that needs to be leased means fewer follow ups with both new prospects and resident renewals.

Avoiding screening exceptions and conducting thorough background checks seem obvious, and they are, but often what's easy to do is also easy not to do. All else equal, property management companies are incentivized to keep effective gross income ("EGI") as high as possible, which typically translates to keeping occupancy high. In some cases, this creates a conflict of interest when a marginally qualified prospect gets approved that shouldn't have been.

Trust me: It's better to find the right new resident than it is to deal with bad debt, skips, or evictions, especially in tougher landlord markets where evictions take longer.

There's no magic formula to choosing CapEx projects, but creating a master business plan during due diligence that includes all of the likely Capital projects (both interior and exterior) is the most efficient way to calculate the sources and uses of funds, to communicate transparently to investors, and to execute the vision.

Lastly, and probably most importantly, I always ask myself one question before I approve a CapEx project: "If this was my money, would I approve this project? If not, why not?"

Treating dollars as if they're your own is the fastest way to clarity and conviction.

Weekly Listen

This week's listen is the most recent Walker Webcast episode featuring host Willy Walker and esteemed guest Dr. Peter Linneman, a renowned economist and quarterly guest of Willy's on the Walker Webcast.

They covered the hottest topics shaping the economy – tariffs, Fed cuts, inflation, GDP, employment, debt, the stock market, consumer sentiment, single family supply, credit card debt, and more.

You can listen to the full episode here.